Findings of the GfK Consumer Climate study for Germany for June 2014

gfkInterest rate decision causes propensity to save to plummet, but boosts purchasing mood

Nuremberg, 25 June 2014 – The mood of consumers in Germany is more optimistic again. After remaining at around the same level for the past four months, the consumer climate in Germany improved once more in June. Following a revised value of 8.6 points in June, the overall indicator is forecasting 8.9 points for July. Economic expectations climbed to a three-year high and willingness to buy also recorded a slight increase. In contrast, there was little change in income expectations. The consumer climate is further boosted by the slump in propensity to save which was caused by the interest rate decision of the European Central Bank (ECB).

The ECB’s renewed cut of its key interest rate to 0.15 percent and its introduction of a penalty rate on bank deposits placed with the central bank have provided an important boost to the consumer climate in Germany and been a significant factor in the indicator rising this month. This fiscal policy decision has had a strong negative impact on the propensity to save. The improvement in willingness to buy is also at least partially attributable to this factor. In contrast, there was almost no change in income expectations, with the indicator only falling slightly.

Economic expectations: climb to three-year high

The economic outlook of Germany is currently in brilliant shape. In June, the indicator increased by 7.7 points to 46.2 points. This is the highest value since June 2011, when it reached 50.3 points exactly three years ago. The upward trend in the economic indicator has therefore been consolidated.

Following a robust start to 2014 for the German economy, the current focus of consumers in view of economic developments is predominantly on general domestic conditions such as labor market situation, propensity to invest and inflation. There are clear positive signs in these areas and gross domestic product (GDP) is expected to grow by around 2 percent this year. The recently published forecasts by economic experts also suggest that this will be the case.

However, the development of international crises, including in Iraq, Syria and Ukraine, continues to be an unpredictable risk factor for the economy. A distinct escalation of the troubles in these countries would also be likely to affect the economic mood in Germany. Companies in Germany evidently also fear a worsening of the international situation. Accordingly, the Ifo Business Climate Index fell slightly in June.

Income expectations: almost unchanged

Income expectations almost sustained its extremely good level in June. The income expectations indicator only dropped by 0.6 points and is currently at 47.2 points. It is therefore only just over five points below the highest value since reunification that was reached in April this year. When compared with the same period of 2013, this equates to an increase of 11 points.

A key aspect supporting the income outlook is that collective wage agreements have resulted in income gains, which acutally equate to increases in real terms in view of the falling rate of inflation. The continued positive labor market situation also offers scope for salary and wage increases, which leaves German employees with considerably more in their wallets than was the case over the last few years.

Pensioners are also benefiting from this good development in salaries. According to information from pension insurance institutes, statutory pensions will be increasing by around 1.7 percent in West Germany and around 2.5 percent in the new federal states from 1 July 2014. After many years of freezes, meaning a cut in real terms, this news is certainly pleasing to pensioners.

Willingness to buy: slight increase

Following only a very slight rise in the previous month, willingness to buy improved more markedly in June. After an increase of 3.7 points, the indicator is now at 53.2 points. This marks growth of almost 17 points on the same period of the previous year.

The propensity to consume is therefore sustaining its extremely stable condition. The trend has currently even turned upward again. As in the previous months, the good framework conditions in Germany, including employment, income development and inflation, determine the consumer sentiment on an ongoing basis.

The decision of the ECB to once again reduce interest rates has been an additional factor that stimulated willingness to buy this month. This move caused the propensity to save to truly plummet in June, which has clearly been to the benefit of the spending mood.

Consumer climate: back on upward trend

Following a revised value of 8.6 points in June, the overall indicator is forecasting 8.9 points for July 2014. After a period of stabilization over the past four months, the consumer climate has improved once again.

GfK therefore maintains its forecast from the beginning of the year that real private consumer spending will increase by 1.5 percent this year. Consumption will therefore continue to be a key pillar of the economy, comprising almost 60 percent of GDP at present.

However, a prerequisite is that there is no further escalation in trouble hot-spots around the world. Alongside the long-lasting crises in Syria and Ukraine, the state of affairs in Iraq has deteriorated quite significantly in recent weeks.  If, for example, energy prices were to rise substantially as a result of the worsening situation in Iraq, consumers would be directly affected. This would have an impact on the consumer climate and the anticipated growth in consumption would most likely not be realized.

These findings are extracts from the “GfK Consumer Climate MAXX sur-vey”, which is based on around 2,000 consumer interviews conducted each month on behalf of the European Commission. The report contains charts, forecasts and a detailed commentary regarding the indicators. In addition, the report includes information on proposed consumer spending in 20 different areas of the consumer goods and services markets. The GfK Consumer Climate survey has been conducted since 1980.

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